The Rosenbaum Law Firm P.C. Blog

As an ERISA attorney, I do get to talk to a lot of financial advisors and ERISA independent fiduciaries around the country, and the lament is that many plan sponsors don’t understand or care about such important fiduciary problems like excessive administrative fees, the lack of an investment policy statement, and the lack of education given to plan participants.

However, sometimes a 401(k) plan sponsor will understand and care without any help. Quite a few years ago, I got a phone call from a doctor from a medical practice. He indicated to me that he thought that there was something wrong with the plan. The plan was being handled by a broker who owed his position in his familial relationship with one of the doctor’s partners. This doctor questioned the third-party administration (TPA) firm (owned by a law firm) and his broker about the plan’s insurance-based platform. Since the plan had 200 participants and $14 million in assets, this doctor thought he could do better with an unbundled provider. The TPA and broker said it was impossible. The doctor was also concerned about fiduciary guarantees offered by the plan’s custodian. The doctor decided that his medical practice should retain my services for a Plan Tune-Up (yes, cheap plug, the $750 plan review that I still shill).

Since the Plan was a safe harbor, discrimination testing wasn’t an issue. A review of the census and valuation reports didn’t show major issues. When it came to plan expenses and a review of investment options, there were plenty of issues. First off, the Plan had 63 different investment options, 63, no joke. I am under the belief that 12-15 investment options are more than enough because studies have shown that more investment options depress employee participation. After all, more choices add to more confusion. A review of plan expenses showed that the fees all in (including the advisor) were more than 200 basis points, which was extremely high for a plan that size. The broker, who has no fiduciary role, netted 60 basis points. I questioned the plan sponsor and there was no investment policy statement and no education was given to plan participants. The plan sponsor also didn’t have fiduciary liability insurance. Needless to say, the plan sponsor was paying a boatload in fees and getting little minimization of their liability.

The Tune-Up noted the concern over the investment options, plan fees, and lack of work performed by the broker. I recommended that an ERISA §3(38) advisor (which the doctor asked about) could offer full protection from liability on the investment process and do it for less than what the broker is collecting for doing nothing.

After reviewing the Tune-Up and having me on the call for a partners meeting, the doctor advised me that the plan sponsor quickly decided to replace the broker and the TPA and hired a new ERISA §3(38) fiduciary who will help them select a new custodian and a new TPA. This was done without my input, this was done because the plan sponsor only took my review as a confirmation of what they already knew.

So when people will tell me that plan sponsors don’t get it or understand their role as plan fiduciaries and the liabilities attached to it, I am reminded how plan sponsor can understand their role without any help from a financial advisor or an ERISA attorney.

In the movie Casino, Robert De Niro’s character Lefty Rosenthal warns Joe Pesci’s character Nicky Santoro that his actions will get him into the Gaming Control Board’s “Black Book”, which means he would be banned from all casinos. Nicky doesn’t take the threat seriously and states that there are only two people in the book and one of them is Al Capone. Of course, Nicky was wrong. There are a lot of people in the black book.

When it comes to retirement plans, the ultimate sanction which is the Internal Revenue Service’s (IRS) penalty or black book for non-compliant plans is “plan disqualification.” Plan disqualification would cause immediate taxation of retirement benefits to participants and disallowance of previous employer deductions. It is the death penalty or neutron bomb for retirement plans.

So often you will hear that failing to follow the plan document can be a disqualifying event or allowing in-service distributions of 401(k) plans prior to a participant attaining age 59 ½.  Threats of plan disqualification are like some of the threats my parents made against me. I’m still scratching my head on my mother’s claim that radishes will grow on my feet if I didn’t clean the dirt from them.

The fact is that plan disqualification is rarely used. It sounds good as a threat, but the Internal Revenue Service would be hard pressed to declare all of the retirement benefits of rank and file employees to be immediately taxable. While I’m sure that plans have been disqualified, I have yet to see one. I’ve had defined benefits plans where all the benefits were invested in Bernie Madoff, or plans where plan sponsors stole, or when owners of the S Corporation  took out excessive loans even though in 2000, they were not allowed to take out loans. None of these plans were disqualified.

The IRS does not want to be in the business of disqualifying plans and depriving participants of retirement savings. That is why they have voluntary compliance programs to correct plan errors and defects. The IRS wants to make plans compliant and will do all they can to make that so.

I once was recommended by a registered investment advisor to help with his client who was reviewing the plan’s operation. The problem was that the client already had an ERISA attorney. Unfortunately, I was asked to draft a notice to interested parties because the plan was being submitted to the IRS. I used boilerplate language that I use for all my plans. The ERISA attorney claimed that there were one or two sentences from the IRS model language (which were not applicable). This ERISA attorney, hoping to upstage me, claimed that the notice would cause the plan to be disqualified. Since the client was being represented by counsel, I had to ask out of the arrangement because I could not believe that this attorney would use the plan disqualification event on something so petty. Of course, the client suffered and had spent their entire $100,000 ERISA budget on this attorney who was using the retirement plan equivalent of yelling fire in a crowded theater.

When it comes to my practice as an ERISA attorney, I am very big on plan sponsors taking pro-active stances to minimize liability, basically good plan fiduciary practices like knowing plan fees, implementing an investment policy statement (IPS), and ensuring that plan participants get the education they need, Letting plan sponsors know about the hidden pitfalls of being a plan fiduciary is not trying to sell fear, it’s about selling preventative practices. That’s like claiming a dentist who tells you to floss is selling fear. Quite honestly a dentist who tells their patients to floss regularly may lose out on some periodontal work in the future. So pushing for plan sponsors to implement good fiduciary practices may avoid some large legal bills down that road, so it’s hardly selling fear. Claiming a plan sponsor will suffer plan disqualification for failing to implement an IPS is selling fear because that will never happen.

Let us not discount plan errors and defects, but let us not make plan disqualification threats that won’t happen.

A friend of mine who is a financial advisor asked me about a third party administration (TPA) firm that is close to where I live in Long Island. My friend has this prospect with a defined benefit plan handled by this TPA.

The name of the TPA brought a smile to my face and I quickly gave him a call. While I was the Director of ERISA Legal Service at a medium-size producing TPA in New York City, I interviewed at this TPA when my son was born 15 years ago.

The owner of the TPA interviewed me and said that the TPA I worked for was not in the TPA business, but in the asset gathering business and he was in the TPA business. He advised me the position would pay the same as my current job, but I would report to a paralegal as my supervisor. The owner of the TPA advised me that they battle quite a bit with the Internal Revenue Service (IRS) because they tend to push the envelope in plan design.

Between the lack of a pay increase and the fact that the company appeared to be small potatoes, I politely declined the job offer.

A year or so later, my TPA was going to take over a defined benefit plan and a 401(k) plan from a Kosher food wholesaler. I reviewed the 401(k) plan and the plan was in order. The defined benefit plan had an issue, the plan listed the normal retirement age of 35! This was prior to the IRS implementing a rule that any retirement age in a defined benefit plan less than 62 was suspect unless facts about the specific industry that the employer was in showed that this was the standard retirement age in the industry. This is done to ensure that companies don’t make the defined benefit plan into an excuse to make excessive tax-deductible employer contributions.

So I remarked to my boss that an age 35 retirement age in the food industry is unreasonable. I stated that it would be reasonable if it was a pension plan for Major League Baseball Players. A financial advisor who works with athletes proved me wrong, he said their retirement age is 42.

As it turns out, many advisors and other TPAs told me that the TPA down the road for me is an insurance mill. All the plans are less retirement vehicle, and more like insurance holding entities. So while my firm was in the asset gathering business, the owner of that TPA was in the insurance selling business.

Insurance in a retirement plan is like drinking alcohol, moderation is key. A little plain vanilla, whole life insurance can be a great asset for any retirement plan. It is when I have seen plan sponsors forfeiting whole life policies because they no longer meet the huge premiums of the policies in the Plan, only to discover that their agent puts his needs instead of his clients.

It is no surprise that the IRS has been cracking down on abusive insurance-funded, retirement plan vehicles over the past 10 years.

I stick to what I know, so I don’t provide financial advice or administer plans. So I think insurance sellers masking as TPAs should stick to what they know, selling insurance.

Being an ERISA litigator isn’t as easy as one may think. For class action lawsuits, you’re fronting money with the hopes of getting a large settlement in a class action. You’re pushing novel legal theories and sometimes, the court pushes back.

A U.S. District Court judge in Denver sanctioned Jerry Schlicter’s law firm Schlichter Bogard & Denton $1.5 million for “recklessly” pursuing claims in a shareholder derivative lawsuit against Great-West.

That lawsuit alleged that fees charged by Great-West via its Empower Retirement record-keeping business violated the Investment Company Act’s section that prohibits fees “so disproportionately large that (they) bear no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.”

Judge Arguello threw out that case and hit Schlicter’s firm with sanctions because she said the plaintiffs relied entirely on the opinions of one expert that both the court and defendants had warned were factually inaccurate. Despite that, Schlicter’s firm and plaintiffs went to trial relying solely on this expert as the only means of calculating damages suffered. According to Judge Arguello, the witness was “thoroughly discredited” on the witness stand.

I am not a litigator, but I know that sanctions asked by one party aren’t usually approved by the Judge based on the view that each party should bear its legal costs. Schlicter’s firm must have irritated the Judge so much with a case she thought was frivolous, that she wanted to send a message on how trivial she thought this case was. Of course, expect Schlicter’s firm to appeal.

The SECURE Act made a profound change that will affect any 401(k) plan with part time employees by requiring that long term, part time employees be able to make deferrals in a 401(k) plan

For plan years beginning after Dec. 31, 2020, a 401(k) plan must allow any nonunion employee of the sponsoring employer (or other participating employer) to participate in making elective deferrals as of: the close of the first 12-consecutive month period during which the employee is credited with at least 1,000 hours of service or, if later, the employee’s attainment of age 21, or  the close of the first period of three consecutive 12 months during which the employee is credited with at least 500 hours of service in each 12-month period or, if later, the employee’s attainment of age 21. An employee who does meet this three-year eligibility requirement is referred to as a “long-term part-time employee.”

Plan sponsors must begin tracking hours for these employees on January 1, 2021. That means the first point at which an employee will qualify for participation in a 401(k) plan as a long-term, part-time worker is January 1, 2024.

For any employer contributions allocated to the plan account of a long-term part-time employee, the employee must be credited with one year of vesting service for each 12-month period during which the employee completes at least 500 hours of service. The Internal Revenue Services clarifies that all years of service, even years before 2021, must be considered for determining a long-term part-time employee’s vesting in any employer contributions allocated to that participant’s account, unless those years otherwise may be disregarded per the plan document.

Also, break in service rules will be changed for these  part time employees. Normally, a break in service is defined as a year in which an employee has not completed more than 500 hours of service. For long-term, part-time workers, it is defined as a year in which the employee did not complete at least 500 hours of service.

Sometimes, the house misses. MGM Resorts International has been sued by participants of its 401(k) plan alleging breaches of fiduciary duties by allowing excessive recordkeeping and investment fees.

The lawsuit claims that MGM Resorts breached their duties by failing to review the plan’s investment portfolio to ensure investments were prudent in terms of cost and maintaining certain investment options in the plan when identical or similar investments with lower costs or better performance histories were available. Like many cases before it, the lawsuit challenges the use of some actively managed funds over passive funds because of cost.

The lawsuit also claims fiduciaries failed to use lower-fee share classes for funds offered in the 401(k) plan. The lawsuit claims that costs for recordkeeping per participant in the MGM plan ranged from $72.93 in 2014 to $69.60 in 2018 and they allege that costs should be closer to $35 per participant.

My latest article on JDSupra.com can be found here.

My latest article for JDSupra.com can be found here.

Advisors ask me all the time of the role of education in participant-directed 401(k) plans. Participant directed 401(k) plans that are governed under ERISA §404(c) offer the plan sponsors liability protection based on a participant’s gains or losses on their account when they direct their own investment.

There have been so many misconceptions that plan sponsors and advisors have had concerning ERISA §404(c) plans. They had this belief that if they just give a mutual fund lineup and some Morningstar profiles to plan participants that they are exempt from liability. ERISA §404(c) protection is about following a process and Morningstar profiles are just not enough education to give to plan participants. On the flipside, education to participants doesn’t have to amount to an MBA education.

I think an effective education component to ERISA §404(c) plans should include enrollment meetings where the characteristics of the plan are discussed, as well as the investment options, and offering the building blocks of financial education to assist participants to get a better understanding on how to choose investments.

Advisors that may have issues in offering education should always consider using some of the online resources out there such as rj20.com and smart401k.com.

In addition, written materials such as plan highlights and some Morningstar profiles should always be distributed.

Also while many advisors dislike, one on one meetings to participants should always be offered. While most participants will probably shun such meetings, they should always be offered to those that want them because as we know, every participant has a different financial goal and need. One on one meetings offer participant individualized attention on asset allocation and fund choices; it can be an effective means of educating plan participants more than what a general enrollment meeting can offer. It can help participants understand how retirement plan assets relate to their other assets as part of a comprehensive financial plan.

Advisors should always look at education as liability protection because offering participant education helps a plan sponsor minimize their liability under ERISA §404(c). While I always stress education as an important part of the fiduciary process, it’s not about achieving a specific result from participants directing their own investments. Offering participant education is like the old proverb, “You can lead ahorse to water, but you can’t make him drink.” So no matter how great the education component is, there is no guarantee that it will help plan participants achieve a better financial result because like they say, there is no guarantee in life, except maybe death and taxes. The participant who put all his money into a mid-cap fund because he considers it the “average of the market” may still do so even after getting an education at the enrollment meeting and through one on one meeting. As with most things with retirement plans, it’s about following a process and not guaranteeing a result.

I always talk about my frustrating experience at a certain semi-prestigious Long Island law firm (sorry, Lois). I do it partly to rub my success in their noses because they never had faith in me, but mostly because the way I market myself now is the way I wanted to market myself back there. I could have been a star there, I could have been a contender, I could have been somebody, instead of the bum associate attorney I became.

When I was there, I wanted to use Twitter, I wanted to use Facebook, and I wanted to constantly post articles and blog messages. The bureaucracy of the law firm wouldn’t allow it. Social media was accused of the advertising committee of one of being barred by the legal advertising rules and I had a six-month wait on the publication of my articles because 3 partners had to approve my article before publication and the marketing department was bogged down in producing articles written by the law firm administrator that served no purpose other than his own. Since I made comments about this abuse of resources, this law firm administrator’s article output was whittled to nothing before he jumped ship.

My message was to offer an ERISA practice that would be available for the small to medium-sized plans that thought they couldn’t afford an ERISA attorney with fees on par with what the legal department at a TPA would charge, with the added benefit of an attorney-client relationship. My articles were going to try to help plan providers recruit and maintain clients, which would open a dialogue with these providers with the hopes I’d get clients through referrals by these providers. Since plan sponsors and plan providers were wary of the never-ending possibility of being billed to death by the billable hour, I was going to charge a flat fee.

One of the ideas I had was that I was going to make a run at the clients of the old TPA I worked at. When I left that TPA, I was replaced by two attorneys and a paralegal (perhaps why a few TPAs have outsourced their legal department to my practice, cost-effective is my middle name). So when my old TPA was charging $600 for the Section 415 amendment back in 2010, I was going to charge $300. The only problem is that the advertising committee wouldn’t let me say $300. For some reason, I had to say I’d do it in a cost-effective manner. After contacting 750 of my old clients, I think I got 1 through this approach. 7 years later, I still think what would have happened had I been able to use $300 in the solicitation letter.

So enough of my life story, It’s in my book. As any plan provider, you need to find a message as to why anyone would hire you. Saying you’re cheaper or how the other provider isn’t going to cut it. If you are a financial advisor, the message is about offering value, how your services will help a plan sponsor’s retirement plan, minimize their liability, and improve the retirement outlook of the plan’s participants. If you are a TPA, it’s how you facilitate the plan’s administration, eliminate the potential pitfalls of plan sponsor’s fiduciary liability, and plan design that can help a plan sponsor maximize contributions to certain employees while making the required minimum contributions to the rank and file.

Like ERISA attorneys, plan providers are a dime a dozen. You need to stand out among the crowd and it’s all about identifying a message that can help explain your services to potential clients and why you should be hired among the crowd. Hopefully, you’ll have better luck in getting your message out that I did those years ago at that law firm.